Blockchain technology has brought significant transformation to various sectors, especially finance. Decentralized Finance (DeFi), an emerging technology, accelerates the shift toward “Finance as a Service” (FaaS) for banks, fintechs, and other financial institutions. Unlike Centralized Finance (CeFi), DeFi bypasses traditional intermediaries to provide financial services through peer-to-peer (P2P) networks.

By combining distributed ledger technology, blockchain, and smart contracts, DeFi introduces new market structures that complement the established primary and secondary debt capital markets. This evolution has caught the attention of Credit Rating Agencies (CRAs), who recognise DeFi’s potential to reshape credit markets. DeFi’s impact includes broadening the range of market participants, creating new asset classes, and enhancing financial transaction capabilities.

In decentralized credit rating, a borrower’s creditworthiness is assessed using On-Chain—and sometimes Off-Chain—data without the need for an intermediary. Ratings are generated on a blockchain, managed by a P2P network, without any central authority. Some tech-driven companies have begun creating decentralized credit ratings by analyzing data from multiple blockchains. This information is then minted into a Non-Fungible Token (NFT) known as a credit NFT (cNFT), which can be used by DeFi protocols to set rates or incentives based on the user’s data profile.

Recently, a team based in Dubai and Hong Kong has approached this issue from a Traditional Finance (TradFi) perspective, adapting established models to suit DeFi while introducing new incentive structures to make decentralized credit ratings unique.

The disruptive potential of blockchain continues to influence different facets of finance. From DeFi lending protocols to decentralized credit ratings, blockchain is driving increased efficiency. As more DeFi lending options and asset tokenization initiatives emerge, a growing number of entities will seek to borrow digital assets.

Although decentralized credit ratings are still in their early stages, the progress so far suggests that they could become a powerful and refined tool for assessing creditworthiness in the near future.